Recently, I attended a conference on investing in food and nutrition companies at the University Club. One of the panelists dropped the statement above. It was catchy so I dwelt on it for a while on the train ride back home. I wanted to share my notes.
Trade spend is a blanket term for all cash or equivalent outlay that companies devote to promote their products at a point of purchase. Examples include price reductions, free product/trial and coupons. Trade spend is supposed to stimulate trial and drive post-promotion volume growth at full profit margin. A simple way to measure ROI for trade spend is:
ROI = (Incremental Volume * Contribution Margin – Promotional Cost) / Promotional Cost
ROI for trade spend is particularly important for small food companies. Due to lack of concrete historical data, buyers often offer shelf space to young companies based on potential e.g., an exciting new super food, a charismatic founder’s story etc. However, buyers usually impose mandatory trade spend on these companies. Spending can be as high as 25% of revenue. Ecstatic entrepreneurs often forget that competitors on the same shelf are also required to invest in promotions. They also forget that promotions are merely a catalyst for future high volume growth at full profit. Numbers ruin a good story. As data accumulates, buyers quietly replace products that don’t meet volume thresholds with new products whose owners have fresh cash to spend on trade.
Before committing to promotions, young companies should focus on a few key things to better position themselves to win.
- Clear Value Proposition – Companies with a strong value proposition are better able to identify relevant customer segments for their products. They also have clearer frameworks for pricing and value. Additionally, they are better positioned to develop compelling marketing materials that resonate with customers and drive engagement. A strong value proposition also allows companies to test products on different potential customer segments, collect more data and improve their offering.
- Customer Knowledge – Grocery aisles are chaotic. Products are similar and are perpetually on promotion. Brands that can occupy customers’ mind share prior to a store visit have a higher chance of winning. Data gathering is the driver for customer knowledge. Here’s an example: a tart cherry juice company in our portfolio was initially positioned as a recovery product for high-intensity athletes. However, as we gathered more data, we discovered that baby boomers seeking relief from joint pain were also a major customer segment. We adjusted our strategy accordingly.
- Tracking and Adjusting – Companies must also develop tactical mechanisms and processes to test, track and measure ROI for different types of trade promotion. Promotions have to match preferences and habits of the customer segment, geography etc. After testing, promotions that don’t generate positive ROI must be dropped.
My initial takeaway from the panelist was that brands that don’t satisfy buyers’ volume thresholds will lose shelf space. A profounder takeaway was that companies without robust strategic and competitive processes to maximize return on trade spend will fail.